India celebrated Public Sector Day on April 11, 2016. This blog post pays a tribute to the role played by the public sector in India, and discusses a few directions for an even greater role in future.
In India’s post-independence industrial development, evolution of government owned industrial enterprises, commonly called Public Sector Undertakings (PSUs), has been a major high point. While PSUs are generally maligned for the governmental ownership and control as well as the rather bureaucratic approaches of the PSUs themselves, the criticism is misplaced. Anyone who is privy to the huge problem of non-performing assets (NPAs) in the Indian private enterprise sector would agree that performance of enterprises has little to do with the ownership structure, private or public, but probably more to do with a host of factors related to comparative advantage of nations and firms, firm level competitive strategy and, more importantly ownership by leadership. While PSUs comprise central and state governmental ownership profiles, central PSUs are considered to a greater degree in this blog post. Departmental undertakings like Indian Railways as well as public sector banking and financial institutions are not considered either.
In order to differentiate the central government undertakings from the other government owned entities, this blog post refers to them as Central Public Sector Enterprises (CPSEs). The idea of setting up CPSEs was mooted by the visionary planners of young Independent India, notably Pandit Jawaharlal Nehru, the first Prime Minister and P C Mahalanobis, leading statistician and member of the Indian Planning Commission. Over the last several decades, CPSEs have grown to play a stellar role in many technology and capital intensive sectors of India’s industrial economy such as steel, oil and gas, capital goods, power, metals and mining, shipping, aviation, design and engineering, refineries, defence equipment and so on. In several domains, CPSEs remain as leaders to date, despite opening up of all the sectors of the Indian economy to private and foreign participation from 1992. Although used in a different context, the CPSEs have been instrumental in aspiring for and achieving “commanding heights” of India’s Industrial economy.
CPSEs come under the administrative ambit of the Ministry of Heavy Industries and Public Enterprises. In the early years, emphasis was on organizational and administrative enablers like Standing Conference of Public Enterprises (SCOPE), Public Enterprises Selection Board (PSEB) and dedicated department like Department of Public Enterprises (DPE). While the public sector is criticised for governmental controls, successive governments have also been trying to provide autonomy linked to scale and stature of the CPSEs. The concept was initially started in 1997 as Navratna (Nine Diamonds) system (Navratnas have a mystique and positive significance in Indian mythology), acknowledging the stature of nine large high-performing CPSEs. The Navratna concept over the years was expanded both ways, adding Maharatna and Miniratna status to the both sides of spectrum. Each CPSE was expected to have a Memorandum of Understanding (MoU) with the Ministry based on which performance would be assessed.
CPSEs with an average annual turnover of more than Rs 25,000 crore (USD 3.8 billion), an average annual net worth of more than Rs 15,000 crore (USD 2.3 billion) and an annual net profit of more than Rs 5,000 crore (USD 770 million) over the last three years along with listing on stock exchanges and significant global presence/international operations qualified to be Maharatnas (Great Diamonds). CPSEs which had ‘excellent’ or ‘very good’ rating in the MoU system over the last five years and had achieved a composite score of 60 or above in the six selected parameters of net profit to net worth, manpower cost to total cost of production/services, profit before depreciation, interest and taxes to capital employed, profit before interest and taxes to turnover, earnings per share, and inter-sectoral performance were granted Navratna status. CPSEs which made profits in the last three years continuously and had positive net worth were considered for grant of Miniratna status. Presently, there are 7 Maharatna, 17 Navratna and 73 Miniratna CPSEs. These Ratnas span every conceivable segment of core industry and infrastructure operations, and bring global stature to India’s industrial capabilities. While the core of Navratna concept was financial autonomy in terms of investments, it also became a benchmark for CPSEs to develop and accomplish performance goals.
Shining in the dark
The relevance of CPSEs to India was that they singularly shone during the dark nights of India’s industrial weakness. The 7 Maharatnas, BHEL, Coal India, GAIL, IOC, NTPC, ONGC and SAIL are leaders in capital goods, coal mining, gas exploration and distribution, oil refining, thermal power, oil exploration and steel. The 17 Navratnas are leaders in defence electronics (BEL), oil refining (BPCL and HPCL), defence aeronautics (HAL), design and engineering (EIL), telecommunications (MTNL), metals, minerals and mining (NALCO, NMDC, RINL, NLC), construction (NBCC), oil (OIL), power (PFC, PGC, REC), logistics (CCI) and shipping (SCI). The 71 other CPSEs which are Miniratnas are in similar and allied domains, with some being in direct consumer and retail services as well (for example, IRCTC). While the preponderant presence in core sectors of the economy is a hallmark of the CPSEs, it has been a natural evolution as well given that private sector had neither the resources nor the inclination to go on such long haul and politically sensitive sectors.
While it may be easy to say today that government has no business to be in the business of industry, the contributions of the CPSEs to India’s equitable economic development cannot be overemphasized. A CPSE like HUDCO brought in a much needed revolution in the financing of affordable housing and housing refinance on a massive scale while another CPSE like Rural Electrification Corporation gave the much needed thrust for electrification of villages. Both the tasks would not have been accomplished on the scale and affordability parameters as done by these two entities. Engineers India, IRCON. PDIL, MECON, Railtel, RITES, EPIL, TCIL and such other corporations developed India’s engineering and design capabilities as a national competitive advantage. More recently, Indian Renewable Energy Development Agency has stood out as a contemporary example of CPSEs continuing to chart into sunrise territories. While not a subject of this blog post, the public sector banking system has contributed to socio-economic development in a manner that a pure private sector banking system would have been hard put to deliver.
Polishing the diamonds
CPSEs thus promoted, and continue to promote, self-reliance in vital sectors of the economy. The above does not mean that the best has been achieved in respect of CPSEs. Like diamonds, Maharatnas, Navratnas and Miniratnas also require polishing. The polishing of diamonds is indeed an expert job; so is polishing of CPSEs. Ideally, the leadership of CPSEs is the ideal instrument to hone the capabilities of CPSEs. More fundamentally, the MoU system may be overhauled to incorporate challenging global benchmarks and creative corporate and functional strategies to enable the Ratnas shine better. Each of the 7 Maharatnas and 17 Navratnas have, for example, the potential to be amongst Fortune 500 list of global firms. The 73 Miniratnas can be niche, boutique firms on standalone basis or become Navratnas through collaboration and/or consolidation. The requisite scaling can be built up through more of ‘Make in India’ on one hand and ‘Grow in Globe’ on the other.
The external affairs initiatives launched by the NDA government as well as the new global stature for India and domestic growth passion, both assiduously promoted by Prime Minister Narendra Modi should be diligently followed up by the CPSEs. Given the resources at their command, the opportunities that can be explored and exploited by the CPSEs in India and abroad could be virtually limitless. A onetime global consulting study in respect of these 24 companies would be a really worthwhile investment to develop and execute such a domestic and global initiative. Some of these could involve expansion within India as well as globalization of operations, besides domestic and global joint ventures. As a first step, special efforts must be laid on having visionary leaders at the helm as well as creation of chief strategy officer posts in CPSEs with challenging ‘sky-is-the limit’ growth mandates.
Stake dilution, value accretion
The emphasis of the CPSEs, public, economists and the governments with reference to the CPSEs seems to be only on disinvestment, and monetising the value for the government and help in the process of reining in the fiscal deficit. While this is also mandated by minimum public shareholding norms and, in some cases, straightforward privatisation goals, the ideal route for the CPSEs would be to issue additional shares to bring in public and foreign equity. This would certainly strengthen the capital structure of CPSEs and let them pursue higher scale with enhanced technological capabilities. The government should appreciate that stake dilution as per the existing methodology tends to be a constant overhang on the stock market price for the CPSEs, thus limiting capital raising at the rich valuations they deserve. It is time that the full market capitalization potential of CPSEs is understood and realized. Alongside such a new funding approach, individual CPSEs should relentlessly pursue operational excellence and value creation initiatives.
As contrasted with realization from stake sale, enhanced annual dividends from operations would be a recurring source of income from the CPSEs for the central government. This requires adoption of strategies and techniques of competitive advantage by the CPSEs. Notwithstanding the natural monopoly provided by certain segments (for example, metals, minerals and mining) and the advantage provided by scale and longevity, all CPSEs must plan and perform as if they operate in highly competitive domains. A firm such as BHEL must seek to beat L&T in market capitalization and there should be no reason why Shipping Corporation should accept a lower EPS than say, a GE Shipping. A study of successful and profitable private sector and public sector players in India and abroad could point to the exciting opportunities that await the CPSEs. The central government should start taking its ownership of CPSEs as a perpetual value enhancing asset that would pay increasing dividends, not only to state exchequer but also to the larger economy!
Posted by Dr CB Rao on April 13, 2016